Here are the new 2023 tax brackets — and how to determine yours

Americans could save on taxes this year because of historically large inflation adjustments set by the IRS.

The agency adjusted many of its 2023 tax rules to help taxpayers avoid “bracket creep.” That’s when workers get pushed into higher tax brackets due to the impact of cost-of-living adjustments to offset inflation, despite their standard of living not having changed. On average, the IRS pushed up each provision by about 7% for 2023.

The changes could mean tax savings for some taxpayers, providing some relief at a time when Americans are still struggling with high inflation that’s eating away at their purchasing power. For instance, some taxpayers could fall into lower tax brackets as a result of the changes, while those who use the standard deduction — relied on by 86% of taxpayers — will be able to deduct more of their income from taxation.

Americans may get a tax refund shock this year

For instance, a married couple earning $200,000 in both 2022 and 2023 would save $900 in taxes this year because more of their income would be taxed at a lower rate, according to Tim Steffen, director of tax planning with Baird.

That could be a welcome change given that this year’s tax returns (for the 2022 tax year) are expected to deliver a “tax refund shock” to many Americans due to the expiration of pandemic tax credits. As a result, refunds could be significantly smaller in 2023 compared with a year earlier.

Still, the tax bracket changes may not save money for everyone, especially those who saw their incomes rise by 7% or more, noted the Tax Policy Center, a think tank that focuses on taxes.

“It’s just keeping them from facing higher taxes if their inflation-adjusted incomes (also known as real incomes) rise by 7%,” senior fellow Robert McClelland wrote in a blog post.

Taxpayers will file their 2023 tax returns in early 2024.

Standard deduction

The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on.

For married couples filing jointly, the standard deduction is $27,700 for 2023, up from $25,900 in the 2022 tax year. That’s an increase of $1,800, or a 7% bump. For single taxpayers and married individuals filing separately, the standard deduction is set at $13,850 in 2023, compared with $12,950 last year. That’s an increase of about 6.9%.Heads of households’ standard deduction in 2023 jumps to $20,800 from $19,400 in 2022. That’s an increase of 7.2%.

“The flip side of this, though, is that it’s going to be harder to itemize your deductions in 2023,” Steffen said. “That means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit next year.”

Most taxpayers take the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction. Only about 14% of taxpayers itemized their taxes after the passage of the tax overhaul, or a 17 percentage-point drop compared with prior to the law, according to the Tax Foundation.

Tax brackets

The IRS boosted tax brackets by about 7% for each type of tax filer for 2023, such as those filing separately or as married couples. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above $578,125 or for married couples with income higher than $693,750.

The lowest rate remains 10%, which impacts individuals with incomes of $11,000 or less and married couples earning $22,000 or less. Below are charts with the new tax brackets.

Tax brackets show the percentage you’ll pay in taxes on each portion of your income. A common misconception is that the highest rate is what you’ll pay on all of your income, but that is incorrect.

Take a single taxpayer who earns $110,000. In 2023, she will take a standard deduction of $13,850, reducing her taxable income to $96,150. This year, she’ll pay:

10% tax on her first $11,000 of income, or $1,100 in taxes12% tax on income from $11,000 to $44,735, or $4,04822% tax on the portion of income from $44,735 up to $95,375, or $11,14024% tax on the portion of her income from $95,374 to her limit of taxable income, $96,150, or $775

Together, she’ll pay the IRS $17,063 in taxes, which amounts to an effective tax rate of 17.7% on her taxable income.

Source: finance.yahoo.com

This Online Brokerage Will Pay You $3,500 Just To Open An Account

Online brokerages are battling each other to win your account. And some are willing to pay up for it.

Surprisingly lucrative bonuses are up for grabs if you open an account with a brokerage or refer a friend to an online broker. Most of the major online brokerages are doing it, including E-Trade, Charles Schwab (SCHW) and Ally Financial (ALLY).

Morgan Stanley’s (MS) E-Trade is the most generous. It’s handing out up to $3,500 if you fund an account with $1.5 million or more.

But don’t worry. Even if you don’t have a million bucks sitting around, brokerages will still pay you.

In IBD’s 2023 Best Online Broker survey, respondents rated the attribute incentives/discounts/pricing 12th out of 18 traits. But everyone loves free money.

Online Brokerages: Bonuses Aren’t Just For Millionaires

Don’t assume you need to be a millionaire for brokerages to offer incentives for your account.

Take E-Trade, for instance. The brokerage pays up the more you put in, but still has attractive offers for lower amounts. E-Trade will pay you $50 for opening an account with as little as $5,000 in it. If you’re able to pony up $20,000 for a new account, that bonus doubles to $100. The bonus keeps rising, reaching $300 for a $100,000 account and $1,200 for a $500,000 account.

To get the bonuses, make sure you enter the BONUS22 code in your application. You must also fund the account in 60 days.

Investor Incentives

Some online brokerages, in fact, are paying ongoing incentives that might appeal most to newer investors with smaller account balances. Take Robinhood (HOOD), the app-based broker that caters to beginning investors. In December, the company launched its new individual retirement account (IRA) offering to help customers save for retirement. Robinhood will match contributions by 1%.

What does that mean in dollars and cents? If you contribute the maximum $6,000, Robinhood will put an extra $60 in your account. “This is not a one-time promotion, but rather a sustainable feature within the Robinhood Retirement account,” said Robinhood spokeswoman Jacqueline White. It’s sustainable because Robinhood keeps contributing to your IRA over time.

“Online brokerages used to offer free trades to attract new clients, but with trade commission for the most part already at zero, they need to find other ways to entice investors to select them,” said Mike Foy, senior director of wealth intelligence at J.D. Power. “Cash offers are common, and some firms are even getting more creative — like Robinhood’s recent announcement that they will match (a portion of) some client IRA contributions.”

Firms are betting that if they can attract assets now, over the long term they will be able to monetize them through selling more fee-based services, including advice and guidance as many investors find they need more help as their wealth grows and their needs become more complex over time. And there’s some evidence that this may be an effective strategy going forward — one example is that we see four out of five (81%) Gen Y DIY investors say they would be interested in an automated or robo-investing service if their firm offered it.”

Sizing Up Online Brokerages’ Offers

Even the largest and most established online brokerages will make it worth your while to work with them.

Charles Schwab, which consistently ranks well in IBD’s Best Online Brokers survey and led the pack in this year’s survey, offers a number of bonuses. Open a new account with at least $50 in the Schwab Starter Kit program, and you can get a bonus of $101. The bonus is put into your new account and you can use it to buy “stock slices,” or a mutual fund-like basket of a number of large stocks.

But Schwab’s potentially most lucrative offer is a bonus of up to $1,000 if you open an account after being referred by an existing Schwab client. The bonus varies based on how much you put in your Schwab account.

The bonus is $100 if you deposit $25,000, going all the way up to $1,000 if you open a $500,000 account. To get your bonus, make sure you get a referral code from the existing Schwab member and fund the account in 45 days.

Just know that bonuses are constantly changing and can vanish at any time.

Fidelity, another top-rated online broker with IBD survey respondents, offered a bonus of $150 for people who opened accounts with at least $50 in its holiday-themed Starter Pack offer. But that offer expired in early December. It has since renewed it. And not all brokers offer bonuses, including Interactive Brokers (IBKR).

Know The Risks

Additionally, most bonuses have stipulations attached that you must follow. Most commonly, you have roughly a month to get the money into the account to get the bonus.

And if you’re planning to close your existing account and move your money, you might face a fee on the way out. Online brokers might charge $50 or more if you transfer your account, sometimes called an ACAT transfer fee. You might be able to avoid the fee if you only transfer part of your old account, not the whole thing.

But there’s also a bonus to help with the fee, too, if you must pay one. For example, if you move an account worth $2,500 or more to Ally Invest, a unit of Ally Financial (ALLY), it will reimburse transfer fees up to $75.

Source: investors.com

3 Best-Performing REITs With Dividend Yields Above 8%

One of the best things about real estate investment trusts (REITs) is the diversity of property types, which allows investors to choose subindustries as well as the ability to choose an investment based on its dividend income or recent momentum.

Some income investors buy REITs strictly for high-yielding dividends. Other REIT investors look for ongoing growth. But every once in a while, it’s possible to get both.

Take a look at three distinct REITs with dividend yields above 8%. Each underperformed in 2022 but have recently been one of the best REIT performers over one- and four-week time frames.

Western Asset Mortgage Capital Corp. (NYSE: WMC) is a Salt Lake City-based diversified mortgage finance REIT (mREIT) with an emphasis on procuring undervalued mortgage assets. Western Asset Mortgage Capital is externally managed by Western Asset Management Company LLC, which invests in agency residential mortgage backed-securities (RMBSes), nonagency mortgage-backed securities (MBSes) and asset-backed securities (ABSes).

Western Asset Mortgage Capital suffered through a terrible 2022, losing 54.5% from January through mid-December. Since that time, it has a four-week gain of 19.95% and has risen 8.05% over the past five trading days.

The dividend of $0.60 per share was cut to $0.40 per share in April 2022 but has been stable since then. The $1.60 annual dividend per share yields 15.4%.

Global Medical REIT Inc. (NYSE: GMRE) is a Bethesda, Maryland-based healthcare REIT that owns specialized facilities it leases to healthcare systems and physician groups. Global Medical REIT owns and operates 189 buildings with over 4.8 million net leasable square feet across the U.S. It has an average rent escalation of 2.1%.

Global Medical REIT pays a quarterly dividend of $0.21, or $0.84 annually, which presently yields 8.01%. In 2022, Global Medical REIT had a total return of negative 42.35%.

But over the past five days, Global Medical REIT has risen 5.22% and has produced a four-week gain of 13.41%.

Office Properties Income Trust (NASDAQ: OPI) is a Newton, Massachusetts-based real estate company that owns, leases and manages office space. Its 162 properties across 31 states have a solid tenant base, including a high percentage of government offices.

Despite this, Office Properties Income Trust has had declining revenue and volatile earnings per share (EPS) over the past three years. Its occupancy rate of 90.7% is still a bit low but represents a recent increase from 89.4%.

Office Properties Income Trust pays a $0.55 quarterly dividend per share, or $2.20 annually, that presently yields 12.9%. Office Properties Income Trust was down about 40% in 2022, touching a 52-week low in mid-October of $12.21, but has since bounced back to over $17 per share.

As for performance over shorter time frames, Office Properties Trust has gained 4.41% over the past five days. The four-week gain of 24.71% is even more impressive.

There is always a cautionary note to be made with very high-dividend yields, as some companies have high yields because of poor performance and may be at risk of dividend cuts. Investors should always perform adequate research and due diligence before investing in any stock but especially those with very high-dividend yields.

Source: finance.yahoo.com

What Income Level Is Considered Rich?

Earning more money can make it easier to pay the bills, fund your financial goals and spend on hobbies or “fun,” but what income is considered to make you rich? The answer can depend on several factors, including where you live, what type of job you have, how much you save or invest and how you typically spend your money.

What Income Is Considered Rich?

Pinning down an exact income level that qualifies you as “rich” is difficult, as there are numerous studies and surveys that attempt to measure it. To keep things simple, let’s consider where the Internal Revenue Service (IRS) sets the bar for the top 1% of earners first.

According to the most recent data available for fiscal year 2019, an income of $540,009 per year puts you in the top 1% category. Based on that figure, an annual income of $500,000 or more would make you rich. The Economic Policy Institute uses a different baseline to determine who constitutes the top 1% and the top 5%. For 2021, you’re in the top 1% if you earn $819,324 or more each year. The top 5% of income earners make $335,891 per year.

What Is a Rich Monthly Income?

The amount of money you need to make each month to be rich depends on which metric you’re using. If you’re going by the IRS standard, then you’d need to make approximately $45,000 a month to be rich. On the other hand, if you’re aiming for the top 1% as measured by the EPI, you’d need a monthly income of $68,277.

To reach that level of income, you’ll likely need to have something more than the typical 9-to-5 job. Examples of people with monthly incomes in that range can include successful business owners, celebrities, athletes and online influencers or content creators.

How Much Income Do You Need to Be in the Top 20%?

The real median household income in the U.S. is around $71,000, according to the latest Census Bureau data. In order to be in the top 20% of income, you’d need to earn nearly double that amount or an average of $130,545 per year.

That’s according to a SmartAsset study of income distributions in the 100 largest U.S. cities. The study found a wide range of income distributions geographically, with residents of San Francisco needing an income of $250,000 or more per year to land in the top 20%. Meanwhile, you’d need an income of $70,444 to be a top 20% earner in Detroit.

It’s important to remember that the definition of what it means to be rich is subjective. Someone who makes $250,000 a year, for example, could be considered rich if they’re saving and investing in order to accumulate wealth and live in an area with a low cost of living.

Rich vs. Wealthy: What’s the Difference?

Being rich is one thing, but being wealthy can mean something entirely different. Someone who’s rich may have cash available to spend on luxury goods or take expensive vacations. A wealthy person, on the other hand, might be more focused on increasing their net worth and creating a long-lasting financial legacy.

So, what’s the cutoff to be considered wealthy? Again, it’s subjective and there are lots of different numbers that may be tossed around. Someone who has $1 million in liquid assets, for instance, is usually considered to be a high net worth (HNW) individual. You might need $5 million to $10 million to qualify as having a very high net worth while it may take $30 million or more to be considered ultra-high net worth.

That’s how financial advisors typically view wealth. The average American, on the other hand, sees $774,000 as a sufficient net worth to be financially comfortable and a net worth of $2.2 million to be wealthy.

How to Become Rich

If you’d like to reach millionaire status or join the ranks of the rich, you’ll need a strategy for achieving that goal. Short of winning the lottery or inheriting a fortune, becoming rich takes some effort. Just how much effort can depend on where you’re starting from.

Here are some of the most impactful steps you can take to become rich.

  • Earn more: Increasing your income means you’ll have more money to save, invest and pay down debt, all of which can help to boost your net worth. There are different ways to increase income, including negotiating a pay raise, pursuing higher-paying roles, taking on a part-time or second job and starting a profitable business or side hustle.
  • Budget: Budgeting is one of the simplest ways to take control of your money and become rich. When you budget, you’re deciding how to allocate the income that you have each month. That makes it easier to work toward your goals of saving and increasing your net worth.
  • Reduce debt: Your net worth is calculated based on how much you owe versus what you have in assets. Paying down debt can help you get on the path to becoming rich if you’re able to free up more money for saving and investing. If your debt is expensive due to high-interest rates, consolidating or refinancing it or using a 0% APR balance transfer could make it easier to pay down what you owe.
  • Invest: Investing and saving money are both important but they’re entirely different. When you save money, you’re typically putting it into a savings or CD account at your bank where it can earn a little interest. When you invest, you’re putting your money into the market where it has the potential to earn much higher returns. If you’re not investing yet, the easiest way to get started is to contribute to your retirement plan at work. You might have a 401(k), for example, which you can contribute to from your paychecks automatically. As an added bonus, your employer might match some of what you put in, which is free money for you. In addition to a workplace retirement plan, you can also begin building wealth through an Individual Retirement Account (IRA) or a taxable brokerage account.
  • Get professional advice: Talking to a financial advisor can help you formulate a plan for saving and investing in order to build wealth. Your advisor can also guide you through the basics of making a budget and creating a workable debt payoff plan.

The Bottom Line

In terms of what income is considered rich, there’s no single number to go by. How you define being rich for yourself can depend on the amount of money you need to feel financially comfortable and how you use the income and assets that you have. To one person it means not worrying about money while to others it just means having enough money in retirement to not impact their lifestyle. Once you define what rich means to you then you can build a financial plan to help you reach that goal.

Source: finance.yahoo.com

Roth IRA Conversion Rules

A Roth IRA can be a great place to stash your retirement savings. Unlike a traditional IRA, you won’t have to pay income tax on the money you withdraw or be required to take a minimum amount from your account each year after you reach a certain age.

These retirement accounts are available to just about everyone. While you can’t contribute to a Roth IRA if your income exceeds the limits set by the IRS, you can convert a traditional IRA into a Roth—a process that’s sometimes referred to as a “backdoor Roth IRA.”Read on to learn about Roth IRA conversion rules that you may be able to use.

Roth IRA Conversion Rules

Converting all or part of a traditional IRA to a Roth IRA is a fairly straightforward process. The IRS describes three ways to go about it:

  1. A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days
  2. A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution
  3. A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution

Of these three methods, the two types of transfers are likely to be the most foolproof. If you take a rollover and, for whatever reason, don’t deposit the money within the required 60 days, you could be subject to regular income taxes on that amount plus a 10% penalty. The 10% penalty tax doesn’t apply if you are over age 59½.

Whichever method you use, you will need to report the conversion to the IRS using Form 8606: Nondeductible IRAs when you file your income taxes for the year.

Tax Implications of Converting to a Roth IRA

When you convert a traditional IRA to a Roth IRA, you will owe taxes on any money in the traditional IRA that would have been taxed when you withdrew it. That includes the tax-deductible contributions you made to the account as well as the tax-deferred earnings that have built up in it over the years. That money will be taxed as income in the year you make the conversion.

Roth Conversion Limit

At present, there are essentially no limits on the number and size of Roth conversions you can make from a traditional IRA. According to the IRS, you can make only one rollover in any 12-month period from a traditional IRA to another traditional IRA. However, this one-per-year limit does not apply to conversions where you do a rollover from a traditional IRA to a Roth IRA.

So if you wish, you can roll over all your tax-deferred savings at once. However, this approach is generally not advisable because it could push some of your income into a higher marginal tax bracket and result in an unnecessarily hefty tax bill.

Usually, it’s wise to execute the conversion over several years and, if possible, convert more in years when your income is lower. Adopting this strategy could result in paying less tax on each additional dollar of converted money. Stretching transfers out may also reduce the risk that your taxable earnings will be too high for you to qualify for certain government programs.

Another good time to convert: when the stock market is in bad shape and your investments are worth less.

Backdoor Roth IRAs

In 2022, Roth IRA contributions were capped at $6,000 per year, or $7,000 per year if you were 50 or older. For 2023, maximum Roth IRA contributions are $6,500 per year, or $7,500 per year if you are 50 or older. These limits do not apply to conversions from tax-deferred savings to a Roth IRA.

In addition, people whose incomes exceed a certain amount may not be eligible to make a full (or any) contribution to a Roth.

However, people in that situation can still convert traditional IRAs into Roth IRAs—the strategy known as a “backdoor Roth IRA.”

Beware of the 5-Year Rule

One potential trap to be aware of is the so-called “five-year rule.” You can withdraw regular Roth IRA contributions tax- and penalty-free at any time or any age. Converted funds, on the other hand, must remain in your Roth IRA for at least five years. Failure to abide by this rule will trigger an unwelcome 10% early withdrawal penalty.

The five-year period starts at the beginning of the calendar year that you did the conversion. So, for example, if you converted traditional IRA funds to a Roth IRA in November 2022, your five-year clock would start ticking on Jan. 1, 2022, and you’d be able to withdraw money without penalty anytime after Jan. 1, 2027.

Remember, this rule applies to each conversion, so if you do one in 2023 and another in 2024, the latter transfer will need to be held in the account for a year longer to avoid paying a penalty.

Does a Roth IRA Conversion Make Sense for You?

When you convert from a traditional IRA to a Roth, there’s a tradeoff. You will face a tax bill—possibly a big one—as a result of the conversion, but you’ll be able to make tax-free withdrawals from the Roth account in the future.

One reason that a conversion might make sense is if you expect to be in a higher tax bracket after you retire than you are now. That could happen, for example, if your income is unusually low during a particular year (such as if you’re laid off or your employer cuts back on your hours) or if the government raises tax rates substantially in the future.

Another reason that a Roth conversion might make sense is that Roths, unlike traditional IRAs, are not subject to required minimum distributions (RMDs) after you reach age 73 (starting in 2023) or 75 (starting in 2033). So, if you’re fortunate enough not to need to take money from your Roth IRA, you can just let it continue to grow and leave it to your heirs to withdraw tax-free someday.

Moreover, you can continue to contribute to your Roth IRA regardless of your age, as long as you’re still earning eligible income. Since January 2020, you can also keep contributing to a traditional IRA (previously you had to stop at age 70½).

How Much Tax Will I Pay If I Convert My Traditional IRA to a Roth IRA?

Traditional IRAs are generally funded with pretax dollars; you pay income tax only when you withdraw (or convert) that money. Exactly how much tax you’ll pay to convert depends on your highest marginal tax bracket. So, if you’re planning to convert a significant amount of money, it pays to calculate whether the conversion will push a portion of your income into a higher bracket.

Is There a Limit to How Much You Can Convert to a Roth IRA?

You can convert as much as you like from a traditional IRA to a Roth IRA, although it’s sometimes wise to spread these transfers out for tax purposes.

What Happens When You Convert to a Roth IRA?

When you convert a traditional IRA to a Roth IRA, you pay taxes on the money you convert in order to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future.

What Is the Downside of Converting From a Traditional IRA to a Roth IRA?

The most obvious downsides are the hit to your current tax bill—your IRA withdrawal amount will count as taxable income for that year—and that you can’t touch any of the money you convert for at least five years—unless you pay a penalty.

The Bottom Line

Converting a traditional IRA or funds from a SEP IRA or SIMPLE plan to a Roth IRA can be a good choice if you expect to be in a higher tax bracket in your retirement years. To reduce the tax impact as possible, it may be advisable to split conversions of large accounts over several years or wait until your income or the assets’ values are low. Either way, converting your investments to a Roth allows your earnings to grow and eventually be distributed tax-free, potentially saving you thousands of dollars in the long run.

Source: investopedia.com

Opinion: It’s time to buy I-bonds again; here are 3 ways to maximize your $10,000 inflation-fighting investment

The current rate is good, but if you hold off until just before the next change, it could be even better.

Another year, another $10,000 you can buy in Series I bonds.

The once-obscure Treasury investment soared in popularity last year because of its enticing inflation-adjusted rate, which peaked at 9.62%. That leapfrogged bank deposit accounts and completely trounced negative stock- and bond returns. The caveat? Individuals are limited to $10,000 per year, and those who hit the maximum had to wait until the new year to get more.

So now that you can buy more, the question is, when should you?

The current annualized offering at TreasuryDirect.gov is 6.89%, which is a composite of a 0.4% fixed rate that stays for the life of the bond, and a half-year rate of 3.24% that is good until the end of April. Note that you’re locked into I-bonds for one year, and you lose three months of interest if you cash out before five years.

At the turn of the new year, that’s above comparable investments that are still under 5%, such as high-yield savings accounts, certificates of deposits, TIPS and Treasury bills and notes — but not by quite the margin as last year. The next rate change happens on May 1, and we’ll know the last batch of data that feeds into how the inflation adjustment is calculated in mid-April.

1. Why to buy I-bonds now

Making your decision about when to buy your next batch of I-bonds depends on how you feel about the overall U.S. economic situation. If you feel optimistic that inflation is waning and will go back soon to more normal 2% levels, you may want to buy the full amount now and capture as high a rate as you can.

That’s also the case if you’re not planning on holding your I-bonds for long, and will cash them out once your one-year holding period ends.

Financial planner Matthew Carbray, of Ridgeline Financial Partners in Avon, Conn., has been advising clients to make the full purchase now because he thinks the interest rate will be lower in May and going forward. “I don’t feel inflation will tick up much, if at all, between now and April,” he says.

He went all-in for himself on the first business day of the year. “I like to have my money earning the most it can from day one,” he says.

If you follow suit with your $10,000, there are some ways to buy more throughout the year, primarily with a gifting strategy. You can buy up to $10,000 for any individual as long as you have their Social Security number and an email address. They can claim the gift in any year they haven’t already reached their own individual limit.

You can also get up to an additional $5,000 in paper I-bonds as a tax refund, and then convert those to your digital account. That’s something you want to act on right now. Thomas Gorczynski, a senior tax consultant at his own firm based in Phoenix, is planning to pay extra on his last quarterly tax payment and then set the refund to come in the form of I-bonds. “You can easily overpay your fourth quarter estimated tax payment by Jan. 15, and then quickly file your taxes for a refund — then you’re not letting the government hold on to your money for too long,” he says. “You’re not going to get wealthy on this strategy, but inflation-protected investments should be in every portfolio.”

2. Buy half now and hold half until mid-April

Gorczynski is going with a half-and-half strategy for his main I-bond allotment in 2023. He’s putting money in at the end of January (to get a full month of interest where the money is parked now) not only for himself as an individual, but also for several S Corp business entities that he owns. Then he’s going to wait until the middle of April to decide what to do with the other half of the money.

The key for him is whether it looks like the I-bond fixed rate will rise in May, for which there’s no public formula. So he’s watching the real-yield rates of TIPS as a proxy. “If real TIPS yields have been high the whole time, I may wait and hope for a higher fixed rate. It’ll be a guessing game, but I think if the 10-year TIPS is high, there’s a chance the fixed rate will go higher,” he says.

From a tax perspective, Gorczynski expects to start seeing a lot of questions about how to handle I-bond proceeds, which are not taxable as federal income until redemption (up to 30 years), and are exempt from both state and local taxes. He added a section on the taxation of inflation-adjusted investments to his education seminars for tax professionals. Among the pro tips he shares: If an I-bond is redeemed in a year where there’s qualified education expenses, it can be excluded from federal income, making it an attractive alternative to struggling 529 college savings plans.

3. Hold it all until mid-April

The I-bond rate you get in January is the same you’ll get in mid-April, so unless you have money sitting around that you need to move, you could just wait and see.

“By waiting, the only thing that happens is the clock doesn’t start ticking on your one-year holding period,” says David Enna, founder of TipsWatch.com, a website that tracks inflation-protected securities.

Enna is waiting for the inflation report for March that comes out on April 12, and then will be making a decision about what will be the best deal. You could do half your spending in April and half in May, or push the whole amount into one of the months, depending on which looks better. Enna says you have to look at more than what’s happening with inflation, though, because that only constitutes half of the formula. It’s the fixed rate component that matters long-term. “I-bond investors like higher fixed rates,” Enna says.

The case for buying in April would be if economic indicators show real yields down, the Fed stops raising rates and inflation moderates or drops. Then you might assume that the rate in May will be lower overall than now.

The case for May would be if real yields are up, which would then look like the fixed component would also rise. Then you’d have an investment that’s guaranteed to make that amount above inflation every year, which is good for capital preservation. Inflation could also shoot up if gas prices rise or because of some unforeseen variable, and then I-bond’s inflation-adjusted rate could go up higher. Says Enna: “I recommend buying them every year, but I’m the inflation-protection guy. That’s my thing.”

Source: marketwatch.com

401(k) and IRA Contributions: You Can Do Both

The Rules You Need to Know—Plus a Pitfall You’ll Want to Avoid.

Do you have a 401(k) plan through work? You can still contribute to a Roth IRA (individual retirement account) and/or traditional IRA as long as you meet the IRA’s eligibility requirements.

You might not be able to take a tax deduction for your traditional IRA contributions if you also have a 401(k), but that will not affect the amount you are allowed to contribute. In 2022, you can contribute up to $6,000, or $7,000 with a catch-up contribution for those 50 and over. In 2023, those amounts go up to $6,500 and $7,500.

It usually makes sense to contribute enough to your 401(k) account to get the maximum matching contribution from your employer. But adding an IRA to your retirement mix after that can provide you with more investment options and possibly lower fees than your 401(k) charges. A Roth IRA will also give you a source of tax-free income in retirement. Here are the rules you’ll need to know.

IRA Eligibility and Contribution Limits

The contribution limits for both traditional and Roth IRAs are $6,000 per year, plus a $1,000 catch-up contribution for those 50 and older, for tax year and 2022. In 2023, the limits are $6,500 for those under age 50 and $7,500 for those ages 50 and up.

You can split your contributions between different types of IRAs, for example by having both a traditional and a Roth IRA. But your total contribution cannot be higher than the limit for that year. Traditional and Roth IRAs also have some different rules regarding your contributions.

Traditional IRAs

Contributions to a traditional IRA are often tax-deductible. But if you are covered by a 401(k) or any other employer-sponsored plan, your modified adjusted gross income (MAGI) will determine how much of your contribution you can deduct, if any.

The following tables break it down:

IRS Publication 590-A explains how to calculate your deductible contribution if either you or your spouse is covered by a 401(k) plan.

Even if you don’t qualify for a deductible contribution, you can still benefit from the tax-deferred investment growth in an IRA by making a nondeductible contribution. If you do that, you will need to file IRS Form 8606 with your tax return for the year.

Roth IRAs

Roth IRAs provide no upfront tax benefit, and it doesn’t matter whether you have an employer plan. How much you can contribute, or whether you can contribute at all, is based on your tax-filing status and your income for the year.

This table shows the current income thresholds:

Spousal IRAs

You must have earned income to contribute to an IRA. However, there’s an exception for married couples where only one spouse works outside the home. That’s a spousal IRA. It allows the employed spouse to contribute to an IRA of a nonworking spouse and as much as double the family’s retirement savings. You can open a spousal IRA as either a traditional or a Roth account.

What if You Contribute Too Much?

If you discover that you contributed more to your IRA than you’re allowed, you’ll want to withdraw the amount of your overcontribution—and fast. Failure to do so in a timely way could leave you liable for a 6% excise tax every year on the amount that exceeds the limit.

The penalty is waived if you withdraw the money before you file your taxes for the year in which the contribution was made. You also need to calculate what your excess contributions earned while they were in the IRA and withdraw that amount from the account, as well.

The investment gain must also be included in your gross income for the year and taxed accordingly. What’s more, if you are under 59½, you’ll owe a 10% early withdrawal penalty on that amount.

Source: investopedia.com

Social Security’s Biggest Raise in 41 Years Comes With an Unpleasant Surprise

The largest nominal-dollar increase for Social Security checks in history comes with a downside.

Every month, close to 66 million people — mostly retired workers — receive a Social Security benefit. Although this monthly payout isn’t particularly large, with the average retired worker bringing home $1,677 a month as of October 2022, it’s nevertheless a vital source of income for many seniors.

Since 2002, national pollster Gallup has surveyed retirees to decipher how important Social Security income is to making ends meet. Over those two decades, only 9% to 18% of respondents have proclaimed that it’s “not a source” of income they rely on.

With this in mind, it should come as no surprise that the annual cost-of-living adjustment (COLA) announcement from the Social Security Administration is the most-anticipated event every year.

Social Security’s cost-of-living adjustment is an inflation-fighting tool

Social Security’s COLA is a mechanism that’s designed to ensure beneficiaries don’t lose their purchasing power to the rising price of goods and services (inflation). If important expenditures become costlier for retired workers, monthly benefits should increase in lockstep on an annual basis.

For the past 47 years, Social Security’s cost-of-living adjustment has been determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is an index that accounts for the price changes of a large predetermined basket of goods and services. Each of the major and minor price categories within the CPI-W have specific weightings that allow the index to be expressed as a single number. The makes it easy to determine if aggregate prices have risen or fallen when comparing to a specified period.

Calculating Social Security’s COLA is actually really easy. Only the CPI-W reading from the third quarter of the current year (July through September) and previous year are used. If the average CPI-W reading in the third quarter of the current year is higher than the comparable period of the previous year, beneficiaries can expect a raise in the following year commensurate with the year-over-year percentage increase.

In 2023, Social Security recipients are looking at their biggest raise in 41 years.

The largest nominal-dollar benefit increase in history is on its way

Although the U.S. inflation rate peaked at a more than four-decade high of 9.1% in June, it didn’t exactly trail off much in the third quarter. When the final numbers were tallied, the Social Security Administration announced an 8.7% cost-of-living adjustment for 2023.

On a percentage basis, this is the largest year-over-year increase in benefits since 1982. Meanwhile, on a nominal-dollar basis, it’ll represent the biggest year-over-year boost in Social Security’s storied history. The average retired worker is expected to see their monthly Social Security check increase by $146 next year.

Normally, a big COLA wouldn’t be great news. After all, the reason a sizable COLA is being passed along is because the price for a large basket of goods and services has soared. In most years, inflation tends to eat up most, or all, of the cost-of-living adjustment passed along to beneficiaries.

Interestingly enough, 2023 will feature a unique scenario that’s only occurred twice since the century began. Due to a year-over-year decline in Medicare Part B premiums — Medicare Part B is the segment of Medicare that covers outpatient services — retired workers aged 65 and up who’ve signed up for traditional Medicare will get to keep more of their Social Security raise in the upcoming year.

But in spite of this rare occurrence, there’s an unfortunate surprise that awaits a majority of retired workers receiving a Social Security check next year.

An unpleasant surprise awaits most retired workers in 2023

While the largest cost-of-living adjustment in 41 years probably sounds great on paper, it also means that an even larger number of Social Security recipients (especially retired workers) will be subject to the taxation of benefits for the 2023 calendar year. Yes, Social Security income can be taxable.

Nearly four decades ago, in 1983, the Social Security program’s asset reserves (the excess cash built up since inception) were running dangerously low. Congress passed and then-President Ronald Reagan signed the Amendments of 1983 into law. This was the last major bipartisan overhaul of Social Security, and it, among other things, introduced the taxation of benefits to raise additional revenue.

When this new law went into effect in 1984, half of a single filer’s Social Security benefit would be exposed to the federal tax rate if their modified adjusted gross income (MAGI) plus one-half of benefits surpassed $25,000. For couples filing jointly, the income threshold was anything above $32,000. In 1984, in the neighborhood of 1 out of 10 Social Security recipients/couples were subjected to this tax.

In 1993, the Clinton administration introduced another tier of taxation. Up to 85% of Social Security benefits became taxable at the federal rate, using the same MAGI plus one-half benefits formula, if a single filer or couple filing jointly respectively topped $34,000 and $44,000.

The problem is that these income thresholds have never been adjusted for inflation. As COLAs have grown over time, more retired workers are being exposed to federal and possible state-level taxation on their benefits. An 8.7% cost-of-living adjustment in 2023 will undoubtedly introduce some retirees to their first taste of federal taxation on their benefits, as well as increase taxation for those who already pay Uncle Sam each year.

It’s an unpleasant surprise in a year when Social Security checks are set to soar.

Source: fool.com